Agricultural businesses on a knife-edge as financial crisis escalates
This was the warning in a report published by the Prince’s Countryside Fund (PCF), which painted a gloomy picture of the difficulties being faced by farming businesses up and down the country as the sector experienced a third year of declining farmgate prices.
29 Apr 2016
BY Olivia Midgley
PCF chairman Lord Don Curry said the current lack of cashflow, exacerbated by delays to Basic Payment Scheme (BPS) payments, poor weather and plummeting commodity prices, had driven a sharp increase in levels of farm trade credit which had rippled through the entire rural sector.
He spoke of the ‘knock on effect’, as historically profitable businesses, including farms, machinery dealers, auction marts, feed merchants and vets were now also facing financial turmoil.
Lord Curry said: “Twenty per cent of farms are under financial stress and that is a high figure for any industry.
“There is no immediate prospect of the situation improving so that 20 per cent figure could continue to increase.”
Lord Curry said the crisis had left some farming families ‘teetering on the edge’ and urged those in need to seek help from the farming charities.
Worryingly, he said the extent of financial hardship in some cases had pushed businesses towards secondary lenders, something which he said was ‘the worst thing they can do’.
The Farming Community Network chief executive Charles Smith said he was concerned many farmers would not be able to clear short term debt, even with the roll out of BPS payments.
“The level of debt is significant in terms of the size of the businesses involved and their ability to service the debt,” said Mr Smith, who predicted more firms would find themselves in dire straits due to the lack of cash circulating the sector.
Delays to BPS
“Late BPS has had an impact but even when farmers receive those payments any benefit will be short lived and will only tide them over for a few months.”
Allan Wilkinson, head of agriculture at HSBC, but speaking as a PCF trustee, added: “While not every farm business is in a perilous state, the longer this goes on the more danger there is of this affecting others.
“There is already a lot of belt tightening. Even the very best businesses are not making vast amounts of money and are at best breaking even.”
The PCF study, compiled by farm business consultants The Andersons Centre, found the effects on the industry included reduction in available work, decreasing income and potential staff redundancies.
Risk to banks
Lord Curry added: “Suppliers are loyal to their farmers but some of this loyalty is being stretched to the limit. There is a major concern about business liquidity.
“Banks can offer support to an extent but if the business becomes financially unviable it is a risk to the banks.”
The Royal Scottish Agricultural Benevolent Institution (RSABI) chief executive Nina Clancy said the problem was just as bad in Scotland, where calls to the helpline had spiked.
“We are seeing more farmers contacting the charity and we are concerned about the implications of the financial crisis going forward.
“We have set aside reserves to help people and we are expecting to eat into these by £1.5 million in the next three years.”
Key findings from the report
The PCF research, which saw 21 agricultural businesses interviewed by The Andersons Centre, provides a snapshot of the issues which have gripped the sector.
- The decline in prices is likely to continue for most commodities this year and potentially beyond. The worst affected sectors are cereals, milk, and pigs where incomes are dropping sharply
- Half the UK’s farms are no longer making a living from farming itself, and 20 per cent generated a loss, even before accounting for family labour and capital
- Levels of borrowing have almost doubled in the past 10 years. A large proportion of farms across most sectors will see a widening gap between required and actual profit in 2015/16 and most likely in 2016/17
- 17 per cent of farms face major financial problems as their liquidity ratio demonstrates they do not have the ability to pay off their short-term debt
- Current extreme cashflow pressure has driven a sharp increase in levels of farm trade credit which will increase through the year and negatively affect the whole agricultural and rural sector
- The businesses surveyed identified, on average, more than half the proportion of their farming customers were currently experiencing cashflow issues
- Nearly all stated low farmgate prices, especially for milk, and their drop from the high levels in 2013/14 were the main drivers of cashflow challenges at farm level
- The other most commonly quoted driver (10 out of 21 interviews) was the delay in the Basic Payment Scheme (BPS) payment to farmers
While the PCF report makes for depressing reading, it has sought to highlight proactive measures which farm businesses can take to ride out the cashflow crisis.
Among the recommendations, it calls for improved communication and collaboration between suppliers, banks and farm businesses so they can focus on the immediate need to help those struggling with budgeting and managing repayments.
The report also outlined the need for a cross-sector commitment to encourage businesses to engage with farming help charities and the array of business tools and advice available.
PCF chairman Lord Don Curry said the situation had highlighted the need for a sea change in the way agricultural businesses addressed financial management and planning, adding those businesses which had diversified their income had a better chance of surviving the downturn.
“Independent advice is important,” said Lord Curry.
“It can help farmers identify potential solutions, for example new strands of income or adding value to their products.
“Looking forward, we need to engage younger farmers to develop their business skills and look at how to make their businesses more resilient to the shocks, such as the one we are going through at the moment.”
Adam Day, managing director of The Farmer Network, which supports rural businesses in Yorkshire and Cumbria, agreed ongoing volatility meant farmers would need to look more closely at their operations.
“The best advice is to examine your business with a fine-tooth comb and be ruthless,” he said.
“There is so little anyone can do about farmgate prices, but the most successful businesses are those which can look overall and make efficiency savings.
“For example, we know one farmer who asked his vet for 10 per cent off each bill.”
Founded by The Prince of Wales in 2010, PCF seeks to improve the prospects of family farm businesses through its various partnerships, including providing £1 million in grant funding to projects across the UK each year.
Lord Curry said: “The PCF is deeply concerned about the financial pressures farmers are facing and is in regular contact with the banks to make sure they are supportive of farming businesses.
“We have also put pressure on Government and the Rural Payments Agency to ensure BPS payments are paid to those who have not yet received them.”
In an open letter to the wider agricultural community and UK Government (see page 8), Tenant Farmers Association national chairman Stephen Wyrill warned many farming families were living on the knife-edge of survival and, without some form of intervention, the prospects for the next decade looked ‘decidedly bleak’.
Other key recommendations
- UK governments must ensure timely distribution of payments to farm businesses with clear communication of projected timescales
- Defra urged to access aid from the European Investment Bank in order to plug the sector’s cashflow hole
- Targeted support through Common Agricultural Policy (CAP) Pillar 2 to provide business advice
- Farmers urged to access training in business planning and change management
- Identify and evaluate cost of production and efficiency savings for their business
- Seek advice and guidance to influence decision-making on longer-term investments
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